Emerging Markets: Mixed forecast for economic, infrastructure growth

Transport infrastructure and frequency of ocean and air connections drive the competitiveness of emerging markets again this year, as analysts rate “market connectedness” as a key economic indicator for expansion.

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Many economists note that some emerging markets are enjoying robust, domestically-driven growth in 2017 and are less vulnerable to external volatility, providing potential opportunities for expanded global supply chains.

However, a cautionary note has been sounded by Global Insight IHS Markit chief economist Nariman Behravesh. “As commodity prices have plateaued and slid a little, the recent euphoria about emerging markets has also faded,” he says. “Given that world growth is gradually edging up, growth in the emerging world can be expected to strengthen moderately.”

Behravesh also observes that in India, accelerated “remonetization” has eased the cash crunch in recent months, and spending appears to be picking up. Meanwhile, the Brazilian economy has stabilized and prospects look a little more upbeat. Similarly, the Russian economy is expected to start growing again this year, albeit at a weak pace.

In the meantime, Chinese policymakers have instituted a set of potentially contradictory policies aiming to support growth while reducing the high levels of leverage in the Chinese economy, note IHS Markit analysts.

According to IHS, China’s government is accomplishing the first goal with mild stimulus, which helped boost first-quarter growth to 6.9% year-on-year. Chinese authorities are trying to accomplish the second goal via tighter financial supervision and regulation, which has rattled China’s financial markets. IHS has raised the 2017 and 2018 real GDP growth rates by 0.1%.

“However, we also believe that China’s economy will decelerate in the next few years,” says Behravesh. “The good news for all emerging markets is that growth dynamics are the best since 2014.”

Analysts with Frontier Strategy Group, a Washington D.C.-based emerging markets consultancy, note that China’s current market has major implications for global logistics managers. Risk to the enduring health of the Chinese economy is consistently on their annual “Events to Watch” list as a major global disruptor, they say.

“One key initiative that the Chinese government is working on is to promote more balanced economic development across the country,” says Frontier’s senior analyst Josef Jelinek. “This is part of its ambitious urbanization agenda,”

Among the reasons such an urbanization plan should be of concern to Western businesses are manifest, maintains Jelinek. “China needs to move millions of rural farmers to cities to sustain its economic growth, while avoiding overpopulation in the largest cities,” he says. “By 2020, the government plans to relocate 100 million people, and by 2026, the government plans to relocate 250 million people.”

As a consequence, the government has developed a blueprint to focus urbanization in a specific set of “city clusters.”

For logistics managers working for global companies, adopting such a city-cluster approach to China will benefit from additional scale and a more efficient use of resources, suggests Jelinek. Conversely, if executives continue with a “provincial strategy” or a “Beijing-Shanghai-Guangzhou strategy” they will face supply chain inefficiencies in the years to come leading to decreasing market share, loss of top talent, and distribution model breakdowns.
Importance of infrastructure

Atradius Worldwide, a consultancy specializing in trade credit insurance, surety and debt collections, observes that the relatively “benign” outlook for emerging market economies in 2017 is also threatened now particularly from the effects of developments in the United States.

Doug Collins, vice president and regional director of risk services for Atradius, says that domestically driven growth is an “essential buffer” to insulation from global volatility. This means logistics managers should look for emerging markets that can rely on growth from consumption within their own regions.

“Another factor to keep in mind when evaluating the viability of emerging markets is that young and active populations drive demand,” says Collins. “Strong emerging markets have growing populations, rising middle classes and a hunger for imports and investment.”

In the meantime, a quicker than expected interest rate hike path by the Federal Reserve may expose emerging markets to currency devaluation and capital outflows, increasing borrowing costs and the debt burden if largely denominated in foreign currency.

Indonesia in particular is moderately vulnerable, but other selected countries like India, Peru and Bulgaria are well insulated from external volatility thanks to effective monetary policy, low dependence on risky capital flows and a relatively low external financing requirement in 2017.

Another potential threat to emerging markets is formed by President Trump’s more protectionist stance on trade, which could weigh on growth in countries that send a large share of their exports to the U.S.—especially in Latin America.

Meanwhile, Atradius analysts add that many emerging nations still need to invest in transport infrastructure to support growth.

“In Indonesia, real fixed investment is expected to increase above 6% this year, as the government expedites large infrastructure improvement projects such as toll roads, bridges and airports,” says Collins. “Likewise, India is supporting infrastructure growth, which is directly correlated with improvements in the economy. Major infrastructure upgrades are also anticipated in Peru, Ivory Coast and Kenya.

Finally, Collins says that most optimistic markets have progressive policies driving their governments. Stable political and institutional conditions set the table for business-friendly environments. “Given that infrastructure can be costly, there should be well-developed capital and credit markets to fund projects, along with healthy government finances or a welcoming attitude to foreign investment and ownership of critical infrastructure assets,” he concludes.

Infrastructure concerns

The “Agility Emerging Markets Logistics Index,” compiled each year with the help of analysts from the London-based logistics think tank Transport Intelligence (Ti), contains similar caveats.

“Stagnation in global trade growth and turbulence in emerging markets are reflected in our 2017 index,” says Ti’s CEO John Manners-Bell. “Twenty-four of the 50 countries experienced a year-over-year erosion in their overall scores, which could be considered a broad gauge of their competitiveness that includes growth, market attractiveness, infrastructure and transport connections, as well as business climate.”

Emerging Market Volumes: Air and ocean trade lanes 

Analysts at London-based logistics think tank Transport Intelligence (Ti) note that the busiest emerging markets for airfreight originating in the EU or U.S. tend to connect to larger markets in the “Agility Emerging Markets Logistics Index”: China, UAE, India, Mexico, Turkey, Saudi Arabia, Brazil and South Africa.

However, volume growth along these lanes appears to be subdued. Only EU-India is likely to show double-digit growth this year (forecast at 10.5%), with the next best being EU-Mexico (7.6%). For all other lanes in the top 10, growth is expected to be in the low single digits or negative. Brazil looks to have suffered badly (EU-Brazil down 6.7%, U.S.-Brazil down 11.6%).

The eight fastest-growing lanes involve EU origins. The top five are EU-Vietnam (up 37.2%), EU-Pakistan (up 31.0%), EU-Colombia (up 18.7%), EU-Oman (up 14.4%) and EU-India (up 10.5%).

Flowing in the other direction—from emerging markets to the EU and U.S.—the picture is mixed. Looking at the two busiest lanes, exports to the EU this year are being propped up by China-EU growth of 4.8%, while exports to the U.S. are being hamstrung by a 10.5% decline in China-U.S. volumes.

Among the 25 fastest-growing lanes, growth is overwhelmingly driven by higher volumes of cereal crops, with a few notable exceptions. Among EU/U.S. origin ocean freight lanes, it’s almost always bulk goods that drive volume growth swings.

Overall, EU-origin trade lanes are set for growth of 0.7% in 2017, while the corresponding figure for U.S. lanes is 3%. 

All of 2016’s emerging markets remain in the top 10, but scores for seven of the 10 countries deteriorated: China (1), Malaysia (4), Saudi Arabia (5), Indonesia (6), Brazil (7), Mexico (8), and Russia (10).

According to Manners-Bell, China remained atop the index rankings by “a large margin.” Among countries in the top 10, the markets changing places from the prior year were India (up to No. 2 from No. 3), UAE (down to No. 3 from No. 2), Turkey (up to No. 9 from No. 10) and Russia (down to No. 10 from No. 9).

“Iran was the most improved emerging logistics market, climbing eight spots to No. 18 overall as it reintegrates with the global economy and becomes part of logistics providers’ strategies,” says Manners-Bell.

Ultimately, Ti analysts say that transport infrastructure and frequency of ocean and air connections drive the competitiveness of emerging markets. In that area—which Ti calls “market connectedness”—UAE, Malaysia, China and Chile remained at the top. Russia regressed from No. 10 to No. 13 because the overall quality of its infrastructure has worsened, as has the burden of its customs procedures. Replacing Russia in the top 10 was Kazakhstan, which jumped up to No. 9 on the strength of infrastructure and customs improvements.

“Overall, emerging markets retain much of the capacity for growth and the dynamism with which to create and capture value that much of the investment in them was built on,” concludes Manners-Bell. “In the year ahead, though, a potent mix of challenges, downward pressures and risks threatens to reveal which emerging markets have foundations built on sand.” 

About the Author

Patrick Burnson, Executive Editor
Patrick Burnson is executive editor for Logistics Management and Supply Chain Management Review magazines and web sites. Patrick is a widely-published writer and editor who has spent most of his career covering international trade, global logistics, and supply chain management. He lives and works in San Francisco, providing readers with a Pacific Rim perspective on industry trends and forecasts. You can reach him directly at [email protected]

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